Canada Attracted More Overseas Real Estate Buyers Last Year, but Will It Continue?

Canada Attracted More Overseas Real Estate Buyers Last Year, but Will It Continue?

GIC and Dream Industrial REIT’s Purchase of Summit Industrial Income REIT Provided Boost

In absolute terms, Canadian commercial real estate is still attracting a relatively small amount of foreign capital compared to the United States and United Kingdom. However, on a relative basis, Canada has been attracting more overseas investment than ever before — in a trend that may not last.

While Canada’s commercial real estate has been attracting greater foreign interest, recent moves to expand the capital gains inclusion amount, coupled with increasing levels of property taxes and fees, may weigh on foreign investor interest in the near future.

Canada’s share of total foreign buyer activity received a considerable boost in 2023 when the Government of Singapore Investment Corp. or GIC, a government-owned company assigned to manage Singapore’s sovereign wealth fund, teamed up with Dream Industrial REIT to acquire Summit Industrial Income REIT. The sizable deal closed in early 2023 for a price of CA$5.9 billion, or US$4.38 billion or £3.66 billion.

Foreign buyer activity continued with other real estate transactions occurring in a steady in-flow throughout the year, leading to robust levels in foreign buyer sales volumes. Most of these transactions focused on industrial purchases in the Greater Toronto Area.

On a relative basis, Canada accounted for nearly 1 out of 3 foreign-buyer transactions across the three countries in the first quarter of 2023, again largely thanks to GIC-Dream’s purchase of Summit. Yet even in following quarters, Canada accounted for 11% to 15% of all foreign-buyer transactions, considerably higher than in earlier quarters, where the country’s share tended to range between 1% and 5%.

 

There are several possible reasons for this increase. On a relative basis, Canadian property could be seen by investors as having more upside potential. For example, in Toronto, Canada’s largest industrial market, industrial rents are 21% less than those in Los Angeles, the largest industrial market in the U.S. This gives potential purchasers a longer runway to potentially increase rents.

Another reason could be the valuation of the Canadian dollar. Throughout most of 2023, for example, the Canadian currency was trading at over 1.34 per U.S. dollar, a rate that has historically been in the low 1.20s. This favourable exchange rate means Canadian assets were available to be purchased at a discount by foreign buyers.

In addition, Canada continues to be viewed as a relative island of stability in a global investment market increasingly beset by geopolitical strife and internal political problems. While not without its problems, Canada’s respect for the rule of law, contracts and property rights is higher than in many places.

However, it remains to be seen if this trend of higher foreign investment inflow will continue. Data in early 2024 shows that sales volumes — including purchases by foreign buyers — have gotten off to a slow start compared to the recent past. The government’s April 2024 decision to expand the capital gains inclusion from 50% to 66% may further dampen investor interest. Higher taxes and fees may also affect investment pro formas and could result in fewer deals getting done.

Comments

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